BY DOMINIC WIGHTMAN
The Broken Window fallacy – Henry Hazlitt’s take on Frédéric Bastiat’s essay in Economics in One Lesson – is one of the most basic yet oft forgotten economic lessons known to man. Labour’s manifesto yesterday exemplifies the stupidity or cynicism of certain politicians who continue to promulgate that government spending stimulates the economy. It’s the policy of the heroin addict who cannot see beyond the short-term high. It is bound to end – if conducted on such a large scale as Labour plan – in turmoil.
According to the fallacy, a hooligan lobs a brick through a baker’s shop window. A crowd gathers and begins to reflect on the situation. Then some bright spark points out that the five hundred pounds cost of replacing the window is five hundred pounds going to a glazier who will have five hundred pounds to spend on a hotel stay with his wife, the hotelier will have five hundred pounds to spend at the butchers, and so on. In other words, the hooligan has stimulated the economy and he should be patted on the back as he can now be seen as a benefactor.
This three-minute video is a good one and explains the fallacy in glorious technicolour:
The simplest way to see this fallacy in its full redistributive nature is to think of the baker planning that very afternoon to walk down the road to the tailor’s where he was going to order a five-hundred-pound suit. The community has lost a five-hundred-pound suit and is therefore that much poorer. The glazier’s gain is simply the tailor’s loss – no new employment has been added.
Take the fallacy to a big spending socialist government – one that John McDonnell envisages Labour becoming if they win on June 8th. By borrowing many hundreds of billions, Labour claims, they can stimulate the economy. So, back to the fallacy, Labour will smash a mega window (costing the British people billions) so they can spend those billions on the British economy.
The key is this: if Government spends more, there is precisely that much less spending done by those from whom the money (the British people) is taken. If the government spends more and borrows to pay for it instead of raising taxes, then it’s today’s capital market that is smaller precisely to the extent government spending is bigger.
Labour plans to borrow AND to raise taxes. To smash a window and to charge the gathered crowd.
God help us if Labour get into power on June 8th.